A US-Style Fracking Revolution for the UK?

The U.K. government is lifting a ban on controversial shale gas exploration in an attempt to reap the rewards that shale gas has produced for the U.S. energy market.

Europe's biggest gas user hopes to reduce its reliance on imports from Norway and Qatar and its dwindling North Sea gas supply by allowing shale gas exploration to resume, despite environmental concerns over the extraction process known as "fracking."

The move follows the success seen by the U.S., which could achieve energy independence – and the security that brings – in oil and gas by 2035, according to the International Energy Agency.

The U.S. natural gas industry has suffered a steady decline in gas prices over the past five years, with prices falling 90 percent from around $14 per million BTU in 2008 to around $3 in December 2012 as a supply glut has hurt the market.

"Gas prices have been at unsustainable levels in the U.S.for a good chunk of this year," Seth Kleinman, global head of energy strategy at Citigroup told CNBC. "And they're still really not at levels at which companies can make real money."

Energy companies in the U.S.are building terminals to transform shale gas into liquefied natural gas (LNG)for export. In a research note published earlier this year, Citigroup predicted that total North American energy production will rise from 15.4 million barrels per day in 2011 to almost 26.6 million barrels per day by 2020, creating ripple effects throughout the economy.

The U.S.Energy Department predicts that exports could generate an additional $47 billion in gross domestic product by 2020.

UK Hopes for Shale Boost

The U.K. hopes that it too can profit from cheaper energy prices from shale gas extraction, a process it previously banned after members of the British public reported several "small earthquakes" after test drilling in the northwest of England.

The drilling used a process called fracking – which involves the injection of water and chemicals at high pressure into rock formations to retrieve trapped gas.

Edward Davey, the U.K. Minister for Energy and Climate Change,said on Thursday that the seismic tremors experienced near the northern town of Blackpool, were "not at a level which could cause any damage" and there would be tighter rules to ensure safe exploration.

Pressures to resume shale gas exploration are also coming from mounting energy costs for British households.

In his annual "Autumn Statement," the British Chancellor George Osborne argued that uncertainty over future gas prices meant that the country needed to prepare for "both high and low gas price scenarios," before announcing that there would be consultations on tax breaks for shale gas operations and the creation of an "Office for Unconventional Gas" to cover the regulations needed to keep drilling"safe but simple."

However, there are widespread doubts that the U.K., and indeed Europe, will be able to follow the U.S.'s success, not only because of differences between the U.S. and Europe in terms of environmental regulations, differences in geology and property rights (U.S. residents earn royalties from the shale gas extracted from beneath their homes whereas in Britain, any underground mineral rights belong to the government).

UK Approves Shale Gas Extraction

Seth Kleinman, global head of energy strategy at Citi tells CNBC that gas prices in the US are still too low for companies to make any money out of the shale revolution.

There are also doubts over exactly how much shale gas lies beneath the U.K. The British Geographical Survey (BGS), reports that the U.K.has "abundant shales at depth, although their distribution is not well known."

In 2011, the BGS estimated that the U.K. had 150 billion cubic metres of shale gas reserves – worth only about two years of U.K. gas consumption. In comparison, Cuadrilla Resources, a firm that has an exploration license for shale gas in the U.K., estimates that there is as much as 200 trillion cubic feet of reserves, 70 times the U.K.'s annual gas demand.

The BGS has been commissioned by the Department for Energy and Climate Change (DECC) to create an in-depth report on the location, depth and properties of the shale gas, which is expected to be released in early 2013.

A 'Dangerous Gamble'

Professor John Stevens, Senior Research Fellow in Energy, Environment and Resources at independent analysis organization Chatham House, opposes the government's promotion of shale gas as a viable energy alternative.

"Osborne's view of the future of energy is misleading and dangerous. It is misleading because it ignores the very real barriers to shale gas development in the U.K. and Europe more generally," he said this week.

"The U.S. revolution was triggered by favorable factors such as geology, tax breaks and a vibrant service industry among many others. However,in Western Europe the geology is less favorable,notably with the shale containing a higher clay content making it more difficult to use hydraulic fracturing (fracking)," he said. He called the U.K's "dash for shale gas" a"dangerous gamble."

Stevens added that the government's hope that shale would reduce the rising costs of energy in the U.K. were flawed.

"[The government's view] assumes that gas will be cheaper in the future and, as already explained, while this could be the case it will certainly not be the result of any shale gas revolution in U.K. or Europe in the next five to ten years."